Chapter 2= market power and market failure Flashcards Preview

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Flashcards in Chapter 2= market power and market failure Deck (26):

market failure

occurs when there is an inefficient allocation of resources. Some potentially valuable resources are being wasted ie, not producing as much as they could do. Resources are being used inefficiently and consumers are less well off than they could be.


Market power

is the ability of a producer to exert some level of control over a market; this may include setting prices, restricting output, influencing other producers, creating barriers to entry and influencing suppliers. Where businesses can increase their market share they can usually also increase their market power.



is any agreement within a group of businesses to reduce competition, avoiding competing with each other. The agreement is usually secret and may involve various stages.


cartel members may agree on a range of issues such as:

PRICES may be fixed at a higher level than a competitive market would otherwise reach, or businesses may simply agree not to reduce prices and compete.
OUTPUT LEVELS can be to restrict supply forcing prices up.
MARKET SHARING involves dividing up the market so each cartel has their own area.
DISCOUNT AND CREDIT TERMS can be fixed to disadvantage consumers or suppliers.
PREFERENTIAL SUPPLY means restricting outlets that supply making the product more exclusive.
BID RIGGING means that cartel members may pretend to compete to win contracts but take it in turn to offer the lowest bit.


Where are cartels most likely to occur?

in markets where competition is already limited such as an oligopoly.


explicit collusion

occurs when there is a meeting or actual agreement to follow a joint strategy


tacit collusion

competing firms may not compete in any way the simply keep their prices at roughly the same level. If both charge the same for equivalent products prices will be higher than if competition was strong. They avoid price cutting without having an agreement.


restrictive practices

include any action that a business might use to limit competition for example, they might try and enter a market sharing agreement.


the public interest

means the interests of consumers and society in general rather than the interests of businesses.


ways of promoting competition

- laws against anti-competitive agreements
-restrictive practices prevented
-mergers and take overs may not be allowed (mergers are allowed if market stays contestable)
- only 25% market share
-privatised markets
-investigation and penalties


natural monopoly

occurs when the most efficient scale of production is a monopoly because more than one producer or supplier would involve wasteful duplication of resources.


a regulatory body

is a public authority or government agency responsible for exercising autonomous control over a sphere of business activity.


regulatory capture

occurs when the regulator is influenced by the industry's point of view. This happens easily because they are working closely together.


what is the Competition and Markets Authority responsible for? (CMA)

=investigating mergers
=conducting investigations where competition may be weak
=investigations where there are breeches of UK or EU prohibitions
=penalising cartels
=enforcing consumer protection legislation
= co-operating with sector regulators
=helping businesses suffering due to anti-competitive practices of their competitors


employee protection legislation

equal pay and equal opportunities
minimum wages
the working time directive (max 48 hr working week)
the health and safety act
strict rules preventing unfair dismissal


benefits of regulation

=helps to correct market failure
=creates a more innovative economy
=regulation protects both consumers and employers
=can complain to the CMA if hurt by unfair competition
=regulation can benefit suppliers where monopsony buyers have market power and force prices down
=better working conditions to help raise productivity
=strict rules for all businesses levels the playing field (no business has a competitive advantage based on dubious labour practices)


costs of regulation

=Opportunity cost to the tax payer and so costly for governments
=impose compliance costs of businesses
=may reduce profitability for some firms (so businesses tend to dislike regulation)
=may reduce their ability to invest and grow in the future
=costs passed onto the consumer
=costs must be weighed against the benefits of not allowing businesses to thrive by behaviour that puts others at a disadvantage


why were regulators of natural monopolies set up?

to ensure that natural monopolies do not exploit consumers by overcharging and do not make strenuous efforts to keep their production costs down.


what would happen without regulation?

without regulation, markets would be less efficient and show signs of market failure


monopsony power

exists when the buyer has power over the sellers. opposite of monopoly


problems with market failure for the consumer

restrict competition and raise prices:
so less disposable income
less choice


examples of restrictive practices

forcing retailers to not stock competitors products
refusing to supply retailers who discount
exclusive dealing (supplier forcers buyer to only deal with certain products)


problems with market failure for businesses

poor domestic competition= inefficiency = can't compete abroad
so restrictive practices aren't always good for businesses. may be better to be competitive so that they innovate and compete internationally


problems with market failure for the govt

growth slowed by market failure = impact international competitiveness
lack of innovation


what is the poverty trap?

is a situation where an unemployed person would be even poorer or not much richer to work because they no longer receive unemployment benefit


what is overheating?

when aggregate demand exceeds aggregate supply and inflation is accelerating due to shortages